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Brexit – the end of parallel imports from the UK?

20 April 2017

The United Kingdom's unprecedented vote to leave the EU will undoubtedly cause a broad range of legal issues in the future. This post focuses on the consequences of Brexit on parallel imports - a field of significant relevance, particularly for the pharmaceutical market.

Parallel imports have always been and always will be a major issue within the European Economic Area ("EEA"). The imminent Brexit might have a significant impact on this business model that has - to a far larger extent than in other industries - a niche of its own in the pharma sector.

Parallel imports encompass the trading of genuine pharmaceutical products at the different prices which can be obtained in the different Member States of the EU. The parallel imported products we have in mind when looking at the pharmaceutical sector, are all under trademark protection. Consequently, importing such products into Germany in the course of business would infringe the trademark rights of the manufacturer of those products. The only thing standing between parallel importers and the ongoing violation of trademark rights is the legal principle of "exhaustion" as is provided for in Article 13 of the European Trademark Regulation (Council Regulation No 207/2009/EC). This provision stipulates the following:

”A Community trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.”

In a nutshell, once a product labeled with a trademark has been sold by the trademark owners or sold with their consent, the trademark right is said to be "exhausted" and can no longer be enforced by the owner. However, the effect of exhaustion of trademark rights is limited to such goods that were first distributed to the market within the EU. According to the Agreement on the EEA, distribution to Iceland, Liechtenstein or Norway would also lead to trademark exhaustion for the complete EU as well as these three mentioned countries. Given that restriction, it is clear that parallel imports is a business model that is strictly limited to trades within the EU and Iceland, Liechtenstein and Norway. Any imports from outside the EEA that happen without the consent of the pharmaceutical company, who holds the relevant trademark rights to the drugs involved, immediately constitutes a trademark infringement.

In view of this, the future of the parallel import business between the UK and the EU will basically depend on the conditions both parties are currently negotiating for the post-Brexit era. In this context, the following scenarios are possible:

The first scenario is the so-called “Norwegian model”. Norway has full access to the European Single Market. In return, it is obliged to make a financial contribution and accept a whole range of EU regulations. If the EU and the UK agree on a similar model, the UK will stay closely connected to the EU. Indeed this solution would provide the UK with the advantage of full accessibility to the European Single Market. In respect of parallel imports, choosing the “Norwegian model” would imply that distribution in the UK would still lead to trademark exhaustion for all the states of the EU. However, this type of a “soft” Brexit does not currently appear very likely since the UK would have to accept far-reaching personal rights for EU citizens, such as the fundamental freedom to move, live and work in the UK.

The second potential scenario is the so-called “Swiss model”. The relationship between the EU and Switzerland is unique in that Switzerland is the only member state of the European Fair Trade Association (EFTA) which is not also part of the EEA. However Switzerland's relationship with the EU is governed by numerous bilateral treaties. Under these agreements, Switzerland has achieved broad access to the European Single Market and is able to trade in most goods. In the event that the UK re-joins EFTA, the UK would, on the one hand, still have partial access to some elements of the Single Market yet, on the other hand, have the freedom to independently reposition its own free trade policy to focus on non-EU countries. In this ambiguous position, in order to allow parallel imports from the UK, the then former member state would also have to negotiate separate bilateral agreements with the EU on the treatment of trademark rights, including the scope of the exhaustion of trademark rights for cross-border trades.

As the UK Prime Minister, Theresa May, has already stressed that the UK does not want an "off the shelf" deal, it is most likely that the UK will refuse to compromise on issues such as the free movement of people and could instead choose a third scenario, the “hard” Brexit – leaving the European Single Market and trading with the EU as if the UK were any other country not part of the EU. If this option of the UK leaving the EU without joining any associating agreement eventuates, the existing rules on exhaustion of trademark rights will cease to apply as will the legal basis for both parallel imports into and out of the UK.

Given these scenarios, we will have to face the fact that the parallel import business between the UK and the EU will undergo major changes as a result of Brexit and Brexit may mark the end of any legal parallel import practices between the EU and the UK. However, as negotiations between both parties are still ongoing, the last word has not yet been spoken on this topic. Of course we will keep you updated whenever new developments appear on the horizon.